Under hire purchase the business is treated as owning the asset from the start, so it claims capital allowances on the full cash price, including instalments not yet paid, as soon as the asset is brought into use, and deducts the interest element separately as a revenue expense. Under an ordinary lease the finance company owns the asset and claims the allowances, and the business deducts the rentals instead, with 15% of the rentals disallowed on a car with CO2 emissions above 50g/km.

Why does hire purchase get capital allowances when leasing does not?

Plant and machinery allowances are only due to a person who owns the asset as a result of incurring the expenditure (CA23310). Under a hire purchase contract, legal title does not pass until the last payment, so the hirer would fail that test. Section 67 of the Capital Allowances Act 2001 fixes this by treating the person making the payments as the owner as soon as it is entitled to the benefit of the contract, and by stopping anyone else, including the finance company, from being treated as the owner.

A lessee under an ordinary lease has no equivalent rule. HMRC’s Business Leasing Manual at BLM00525 explains that, unless the lease is a long funding lease, the tax system follows legal form: the lessor is the owner and claims any allowances, and the lessee is treated as paying rentals for the hire of the asset. Those gross rentals, including what the accounts would call interest and capital, are revenue expenses of the lessee so far as the asset is used for its trade.

When can allowances be claimed on a hire purchase asset?

Section 67 is generous on timing. Once the asset is brought into use, the hirer can claim on the instalments still to be paid, not just those already paid. HMRC’s example at CA23310 is a computer bought with a £5,000 deposit and five annual payments of £1,000: once the computer is in use, allowances are available on the deposit and all five future payments. GOV.UK confirms the same for the annual investment allowance: when you start using an item bought on hire purchase, you can claim for all the payments you will make under the contract, but not for the interest.

The asset is allocated to allowances in the normal way, so a van or machine can take the annual investment allowance or, if new and unused, the 40% first year allowance or (for companies) full expensing. A car bought on hire purchase follows the emissions rules for capital allowances on cars.

How is the hire purchase interest deducted?

BIM45351 explains that hire purchase payments contain two parts: capital payments for buying the asset, which are not deductible but may qualify for allowances, and revenue payments for its hire, which are deductible. In a typical contract where ownership passes automatically or for a nominal fee, the revenue element is the total of all instalments less the value of the asset when the agreement was made. BIM45355 says the timing of that deduction follows the accounts prepared under generally accepted accounting practice, which normally spread the finance charge over the term on a finance lease basis. For the bookkeeping, see accounting for hire purchase.

A contract that passes ownership immediately is a purchase by instalments, so none of the payments is revenue hire expenditure.

What about lease purchase and balloon payment contracts?

CA23310 adds an extra rule for lease purchase contracts. The lessee is only treated as the owner during the contract if it would account for the contract as a finance lease. A contract with an option to buy at market value at the end would not be, so the lessee gets no allowances until it pays the option price. Even then, the finance company still cannot claim, because section 67 stops anyone else being treated as the owner.

Several agreements that together give ownership on completion, such as some alternative finance arrangements, are treated as a single hire purchase contract.

How are ordinary lease rentals deducted?

For a lease that is not a long funding lease, the lessee deducts the rentals as revenue expenses, subject to the usual wholly and exclusively test and the car hire restriction below. Accounting has moved on: IFRS 16 (since 2019) and the 2024 amendments to FRS 102 (mandatory for periods beginning on or after 1 January 2026) put most leases on the lessee’s balance sheet as a right of use asset and lease liability (BLM50005). HMRC says the same basic tax principles continue to apply, with most rentals on revenue account, and that Schedule 14 to Finance Act 2019 was designed so that the change gives no tax advantage or disadvantage, with transitional adjustments spread. See the 2026 FRS 102 amendments and IFRS 16 for the accounting.

Long funding leases

A long funding lease is the exception. Under sections 70A to 70YJ the lessee, rather than the lessor, claims allowances (CA23805 and CA23810). A long funding lease is a funding lease, broadly a finance lease or one where the present value of minimum payments exceeds 80% of fair value or the term exceeds 65% of the remaining useful life, that is not a short lease. A short lease is generally one of five years or less, or of between five and seven years if strict finance lease conditions are met (CA23830). Most vehicle and equipment leases taken by small businesses fall outside this regime.

What is the 15% car lease restriction?

Sections 48 to 50B of the Income Tax (Trading and Other Income) Act 2005 and sections 56 to 58B of the Corporation Tax Act 2009 disallow 15% of the hire cost of a car with CO2 emissions above the threshold (BIM47725 and BIM47740). The threshold is 50g/km for hire periods from 1 April 2021 (corporation tax) or 6 April 2021 (income tax); it was 110g/km from April 2018 and 130g/km from April 2013 (BIM47714). The restriction does not apply to:

  • electric cars and cars at or under the threshold;
  • cars first registered before 1 March 2001;
  • “qualifying hire cars”, meaning cars on hire purchase with no option to buy or an option of not more than 1% of the retail price when new, or under a long funding lease;
  • hire for not more than 45 consecutive days, and cars the business hires in and then hires out for more than 45 days (BIM47750);
  • motorcycles, vans and other vehicles that are not cars, although most double cab pick ups count as cars for expenditure from 1 October 2025 (BIM47730).

The disallowance covers the rental and any irrecoverable VAT, but if the agreement separately identifies maintenance charges, those are left out of the calculation. These rules do not apply to businesses using the cash basis (BIM47714).

How do the two compare in numbers?

Illustration only. A company wants a petrol car with emissions of 120g/km for a sales manager.

  • Hire purchase: cash price £30,000, with £3,000 of finance charges over three years. The car goes into the special rate pool, giving a writing down allowance of £1,800 (6%) in the first year and less thereafter. The £3,000 of finance charges is deducted as the accounts recognise it.
  • Contract hire: rental £6,000 a year with no separate maintenance charge. Because emissions exceed 50g/km, 15% is disallowed, so the deduction is £5,100 a year, as in HMRC’s own example at BIM47740.

For an electric car, hire purchase gives a 100% first year allowance on the cash price (for expenditure by 31 March 2027) and a lease gives an unrestricted rental deduction, so the gap narrows considerably. For vans and equipment, hire purchase usually gives faster relief through the annual investment allowance. VAT recovery also differs; see VAT on cars, vans and fuel.

What mistakes come up most often?

  • Claiming allowances on the whole hire purchase total including interest, or deducting the full instalments as an expense.
  • Waiting until the final payment to claim, when allowances on the full cash price are due once the asset is in use.
  • Claiming allowances on a contract hire or operating lease vehicle that the business never owns.
  • Applying the 15% restriction to a hire purchase car with a nominal option fee, or forgetting it on a leased car above 50g/km.
  • Including separately identified maintenance charges in the restricted amount.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.